On February 28, 2017, the SEC issued an order (the “Order”) temporarily suspending the ability of Web Debt Solutions, LLC (“Web Debt”) to utilize Regulation A, pursuant to its authority under Securities Act Rule 258. The Order stems from untrue statements of material fact made in Web Debt’s offering statement on Form 1-A, which was filed with the SEC on July 11, 2016 (the “Offering Statement”). The SEC specifically noted that the Offering Statement: (i) contained inconsistent, contradictory balance statements regarding Web Debt’s total assets in 2016; (ii) included erroneous statements that Web Debt’s chief executive officer had 15 years of experience in the debt collection industry prior to forming Web Debt; and (iii) listed as the address of Web Debt’s principal office, a building that, as of the date of the Order, was currently under construction and without any businesses operating from it. The SEC also noted that Web Debt’s chief executive officer had failed to fully cooperate with the SEC’s investigation, including failing to: (i) produce, in response to a voluntary document request, any documentation related to Web Debt by a stipulated deadline; and (ii) respond to subsequent communications from the SEC regarding the voluntary document request.

A copy of the Order is available at: https://www.sec.gov/litigation/admin/2017/33-10316-order.pdf

At the 35th Annual Federal Securities Institute, a representative of the Securities and Exchange Commission shared some market data.

From its effective date in June 2015 through December 2016, there were 171 Regulation A offerings filed. Of these, 76 were Tier 1 offerings and 95 were Tier 2 offerings. The aggregate proceeds sought to be raised in the filed deals was approximately $3 billion. There were 97 offerings qualified. Thus far, $238 million has been reported sold, though more complete data will be available when issuers file their reports in a few months.

From its May 2016 effective date, 163 companies have filed to undertake crowdfunded offerings. The average minimum raise sought is $100,000 and the average maximum raise is $647,000. The average time period has been between four and six months. 28 deals have been completed raising approximately $8.1 milllion. 24 issuers failed to meet the minimum amount sought and withdrew their offerings.

The Division of Economic and Risk Analysis (DERA) of the Securities and Exchange Commission published a study recently that reviews, among other things, the performance of and the returns of investing in OTC stocks.  The study notes that there have been many studies and there is a wealth of data relating to the performance of NYSE- and Nasdaq-listed securities.  These securities tend to be held principally by institutional investors.  By contrast, there has been less analysis undertaken relating to OTC stocks, which tend to be held principally by retail investors.  While the data and analysis included in the study is on its own quite interesting, we find it particularly relevant in light of the many calls for the establishment of a venture exchange.   The Financial CHOICE Act, for example, includes among its many provisions, a section that relates to the establishment of venture exchanges.  The analysis also is relevant in evaluating whether the OTC markets provide a useful market for the securities of companies that undertake Regulation A offerings.

The study confirms that OTC stocks are less liquid than those listed on national securities exchanges.  The study also confirms a correlation between the availability of information about listed companies and their liquidity—with greater liquidity seen for those companies as to which public disclosures are available.  The study seems to indicate that the returns of OTC stocks are typically negative and that often these stocks are subject to alleged market manipulation efforts.  The study notes that “up-listing,” or moving from the OTC markets to a national securities exchange is quite uncommon, with fewer than 9% of companies transitioning during the study period (2001 to 2010) and less than 1% from the Pink Sheets (now OTC Markets) to a national securities exchange.

The study is available here:  https://www.sec.gov/dera/staff-papers/white-papers/White_OutcomesOTCinvesting.pdf.

On December 7, 2016, the SEC released a white paper on Regulation A+ offerings titled “Regulation A+: What Do We Know So Far?”  The white paper analyzes Regulation A+ offerings conducted from the effective date of Regulation A+ (June 19, 2015) through October 31, 2016.  The white paper notes that during this observation period the rate of Regulation A+ activity outpaced the rate of prior Regulation A activity.  Despite a relatively small sample size and a short observation period, the white paper makes, among others, the following observations:

  • Prospective issuers filed with the SEC offering statements for 147 Regulation A+ offerings, covering approximately $2.6 billion of securities.  Of those offering statements filed with the SEC, approximately 81, covering approximately $1.5 billion of securities, have been qualified by the SEC.
  • $190 million was reported as raised in qualified offerings.
  • With respect to qualified offerings, there were 10 issuers seeking quotation on the OTC Markets, 17 issuers indicating that they would seek quotation on the OTC Markets in the future and one issuer seeking an NYSE listing (no issuers indicated they were seeking a Nasdaq listing).
  • Issuers are availing themselves of both Tier 1 and Tier 2 offerings, but Tier 2 offerings were on the margin more common among qualified offerings, accounting for 60% of qualified offerings.
  • The offering amount varied with issuer’s size, with the average issuer seeking up to approximately $18 million.
  • Issuers mainly offered equity securities, which accounted for over 85% of all Regulation A+ offerings.
  • The majority of Regulation A+ offerings were conducted on a best-efforts, self-underwritten basis.
  • Most of the issuers have previously engaged in private offerings, consistent with the use of Regulation A+ as an IPO on-ramp.

The white paper is available at: https://www.sec.gov/dera/staff-papers/white-papers/Knyazeva_RegulationA-.pdf.

On December 7, 2016, the North American Securities Administrators Association (“NASAA”) proposed a model rule, a model statutory amendment and a Solicitation of Interest Form permitting testing the waters in Tier 1 Regulation A offerings under the NASAA’s coordinated review program.  States are currently preempted from requiring registration for Tier 2 Regulation A offerings, including those using testing the waters, but are not preempted from requiring such registration for Tier 1 Regulation A offerings.  The proposed model rule allows an issuer that intends to register a Tier 1 Regulation A offering to solicit indications of interest from prospective investors if the following conditions are satisfied:

  • the issuer is organized under the laws of a state or territory of the United States, the District of Columbia or a province of Canada;
  • the issuer files a solicitation of interest form and any advertising materials with the administrator at least 15 calendar days prior to the initial solicitation of interest;
  • neither the issuer nor any person acting on its behalf may solicit or accept any money or subscriptions;
  • neither the issuer nor any person acting on its behalf may make any sales until at least seven calendar days after delivering a final offering circular; and
  • certain legends must appear in any solicitation of interest materials.

Certain offerings are disqualified under the proposed model rule, including those involving bad actors, development stage companies, blank check companies, companies involved in petroleum or other mining or extractive industries and pooled investment vehicles.  The proposed Solicitation of Interest Form, which contains basic information about the issuer and the offering, would be required to be filed with regulators prior to testing the waters and also must be provided to prospective investors.  Comments on the NASAA’s proposal are due by January 6, 2017.

The NASAA’s proposal is available at: http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2016/12/Testing-the-Waters-Request-for-Public-Comment-December-2016.pdf.

On November 17, 2016, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued four new compliance and disclosure interpretations (“C&DIs”) addressing aspects of offerings under Regulation A and Regulation D.  Highlights of the C&DIs include, among other things, the following guidance:

  • An issuer that seeks to qualify an additional class of securities by a post-qualification amendment to a previously qualified offering statement under Regulation A must satisfy the requirements of Item 4 to Part I of Form 1-A by providing responses that relate only to the additional class of securities.
  • A change of 20% or less in the aggregate offering price, which is permitted under the Note to Rule 253(b) of Regulation A without a post-qualification amendment, may be measured from either the high end (in the case of an increase in the offering price) or the low end (in the case of a decrease in the offering price) of that range.  However, a change of 20% or less is not permitted where the maximum aggregate offering price would result in the offering exceeding the relevant offering limit ($20 million for Tier 1 offerings and $50 million for Tier 2 offerings) or if the change would result in a Tier 1 offering becoming a Tier 2 offering.
  • Consistent with the treatment of EGCs under Section 71003 of the FAST Act, a company filing or confidentially submitting an offering statement under Regulation A may omit financial information for historical periods otherwise required by Part F/S of the Form 1-A, including financial information of other entities required to be included in Part F/S.  However, the company must reasonably believe that the omitted information will not be required to be included in the offering statement at the time of qualification.
  • Offers and sales of securities made in reliance on Rule 506(b) prior to the use of general solicitation in a subsequent Rule 506(c) offering will not be integrated with the offers and sales of securities made in reliance on Rule 506(c).

A copy of the C&DIs is available at: https://media2.mofo.com/documents/161118-question-182-12.pdf

During the ABA Business Law Section Annual Meeting, at the Dialogue with the Director of the Division of Corporation Finance, hosted by the Federal Regulation of Securities Committee, Keith Higgins offered a comprehensive overview of developments.  Mr. Higgins provided a brief update of the proxy season.  He noted that the Staff is pretty far along in its thinking regarding recommendations for disclosures regarding diversity on public boards, consistent with statements made by Chair White (see our prior posts on this link). Mr. Higgins observed that the comment period had closed for the Regulation S-K Concept Release and noted that a significant number of the comments received focused on ESG issues with commenters advocating more disclosures on sustainability and related matters.  Significant comments were received as well on MD&A disclosures, generally favoring the consolidation in a single place of all MD&A related guidance and supporting the continued use of an executive summary.  Also, most commenters expressed concerns about limiting the number of risk factors, as well as concerns about any requirement to have issuers address their responses to risks. Mr. Higgins noted that consistent with the mandates in the FAST Act, the Commission recently requested comment on the 400 series (see our post).  Mr. Higgins also commented on the recent hyperlink release.

On the JOBS Act, Mr. Higgins provided an update through end of August.  There were 92 Regulation CF filings with issuers from diverse sectors, including biotech, brewery, and real estate.  Ten companies have filed Forms CU having raised an aggregate of $4 million.  There have been 128 Regulation A offering statements filed, and 60 qualified, with an almost even split between Tier 1 and Tier 2 offerings.

Mr. Higgins noted that the Staff is finalizing its recommendations to the Commission on the amendments to Rule 147 and Rule 504.  Also, the Staff is working on the disclosure report mandated by the FAST Act to be delivered to Congress by late November.

“Direct-to-consumer” offerings enable companies to raise capital directly from their customers, with or without the use of underwriters or other financial intermediaries. Direct-to-consumer offerings have garnered attention recently given the ability to conduct offerings using a “crowdfunded” approach; however, companies have conducted direct-to-consumer offerings for years. With the amendments to Regulation A (commonly referred to as “Regulation A+”) and the adoption of Regulation Crowdfunding by the Securities and Exchange Commission (the “SEC”), companies have now become more acutely focused on broadening their investor base by soliciting interest in offerings of their securities from their customers. In this alert, we discuss the history of direct-to-consumer offerings, current approaches, the applicable SEC requirements, and considerations for companies undertaking such offerings.

Read our client alert.

On July 19, 2016, the Advisory Committee on Small and Emerging Companies met to discuss the “accredited investor” definition, the Regulation A market, and the Commission’s recent proposal regarding the definition of “small reporting companies.”  In introductory remarks, Chair White shared that the Commission has received 40 comment letters regarding the Commission’s study on the definition of “accredited investor” and hopes to receive further input from the investment community and the Advisory Committee.  The Advisory Committee confirmed its proposed recommendations to the Commission Staff, which include expanding the definition of “accredited investor” to encompass those with professional accreditations (including Series 7, 65, 82 and Chartered Financial Analyst), prior investment experience and, those who pass an accredited investor examination, among other criteria.  Commissioner Stein, in discussing the proposal for modifying the thresholds for SRCs, expressed particular concern about whether the benefits of scaled disclosure will outweigh the potential lower liquidity and high cost of capital that may result from such changes.  By expanding the definition to include companies with up to a $250 million public float, Committee members stressed that companies, including those prospering through successful Regulation A+ offerings, will enjoy a lighter regulatory burden, which should make offerings more attractive.  The SEC has requested comment on this proposal.

Chair White’s remarks are available at https://www.sec.gov/news/statement/opening-remarks-before-the-sec-advisory-committee-on-small-and-e.html

The agenda for the July 19 meeting of the SEC Advisory Committee on Small and Emerging Companies was recently announced.  During the meeting, the Committee will consider the “Accredited Investor” definition recommendation as discussed during the May 18 meeting.  There will also be an update and review of the first year of Regulation A+. The meeting will conclude with the SEC’s proposal to amend the “Smaller Reporting Company” definition.

The meeting will be live-streamed via the SEC website: https://www.sec.gov/info/smallbus/acsec.shtml